By Elizabeth Rosen
NEW YORK (IRS.com) — Selling a business is an exciting experience, and there are several things you can do to develop a tax strategy to ensure the process goes as smoothly as possible. Business owners who are considering selling their company should take into account the taxes they will owe before putting the “For Sale” sign up.
When a sale produces income, owners have to pay taxes on at least part of their gains from the sale. How these capital gains are taxed depends largely on the structure of the business, whether the business is being sold as a set of assets or as an entity, and the type of assets being sold.
The IRS generally views a business as a collection of assets — including real property, equipment, inventory and goodwill. The gain or loss on the sale of different categories of business assets are taxed differently. When they are sold, the assets must be classified for IRS purposes as capital assets, depreciable property used in the business, real property used in the business or property held for sale to customers (such as inventory or stock in trade). Under the Internal Revenue code, sellers and buyers must assign a specific value to each asset or groups of similar assets and report a gain or a loss from the sale of each asset to the IRS. The sale of capital assets results in a capital gain or loss; the sale of real property or depreciable property used in the business and held longer than one year results in a gain or loss from a Section 1231 transaction; and the sale of inventory results in ordinary income or loss.
The tax consequences of selling your business also depend on the structure of the business. What type of business entity do you have? Because sole proprietorships, partnerships and limited liability companies are considered “pass-through” entities, owners of these companies enjoy a degree of flexibility in negotiating an asset sale.